Goodness Growth Holdings (CSE:GDNS) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Goodness Growth Holdings, Inc. (CSE:GDNS) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Goodness Growth Holdings

How Much Debt Does Goodness Growth Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Goodness Growth Holdings had debt of US$20.5m, up from US$1.94m in one year. However, it does have US$11.8m in cash offsetting this, leading to net debt of about US$8.74m.

How Healthy Is Goodness Growth Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Goodness Growth Holdings had liabilities of US$15.2m due within 12 months and liabilities of US$98.0m due beyond that. Offsetting this, it had US$11.8m in cash and US$995.2k in receivables that were due within 12 months. So it has liabilities totalling US$100.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$165.2m, so it does suggest shareholders should keep an eye on Goodness Growth Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Goodness Growth Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Goodness Growth Holdings reported revenue of US$53m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Goodness Growth Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$42m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Goodness Growth Holdings (2 are a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.